Eminent Domain idea spreading

Robert Hocket, a supporter of this idiotic idea, stated last week that 20-25 municipalities in approximately 11 states (including CA, NJ, WA, OH, NY, and FL) are looking into using eminent domain to seize and rework mortgages.

He also recently wrote a paper about the idea, ironically titled "Paying Paul and Robbing No One", that a muncipality can simply force a lender (the MBS trust in this case) to accept less than the face value of a loan, and then give the borrower a break on the balance. The theory being that because the borrower is underwater, he deserves a break - while in the real world, most of us would ask him to post additional collateral if we were the lender.


Richmond CA, the first mover, has already sent offer letters to buy loans to Trustees and Servicers. A Federal judge ruled that the second suit surrounding this particular city's effort is too early to call. The Trustees' suit highlights that the purported goal of MRP is to make the loans more affordable, but modifying into current rates would actually force payments 19% higher, therefore making them MORE likely to default. Of the 624 mortgages MRP has offered to buy, the vast majority are CURRENT on their payments, 63% were originally cash-out refis, 53% have already received modifications (average payment is $1499 and average WAC is 3.05%), and losses to the MBS Trusts that Fannie Mae owns would total $17mm.

The best quote so far is from the mayor of Richmond CA, Gayle McLaughlin, who said  “We are offering to take the loans for fair market value and that’s what this is all about. To threaten redlining to our community, when they have already suffered clearly massive injustices, it’s just setting us
back.” She is offended that lenders have basically said we won't lend in your city anymore (i.e. redlining) if you don't honor lending contracts in your city anymore... mmmmkay.

*most of this is taken from a few BBG articles, except where stated otherwise. Sorry no links.

How will a lender ever do business in Richmond CA again?

It was reported yesterday that Richmond California has approved the plan to use Eminent Domain to condemn underwater mortgages. ZeroHedge.com has the best review.

We've discussed it in detail previously but the most obvious negative impacts boil down to:

• Lenders will likely flee the market now that the City has created a new law effectively nullifying centuries of contract law. I certainly would not write a mortgage in a municipality that would invalidate it because the collateral value had declined (shouldn't the borrower post MORE collateral in this case?)
• Borrowing costs to individuals are likely to increase dramatically if any lenders remain in the market. The risk to the Lender just went through the roof, they're going to require compensation to offset the risk. This may come through a rate increase or some innovative product such as a home price protection swap or insurance (not mortgage insurance, but systemic price protection "insurance").
• The risk extends to the city and will make it very costly to borrow money at the municipal level. As the Zerohedge article highlights, this has already happened - the city is going to be mired in lawsuits for decades, but somehow has failed to see the future despite a suit already filed in district court with the first motion hearing next week.
• The ripple effects will damage home prices in the city substantially. The first person who wants to sell their house will discover that there are no buyers (unless they're all cash) because there are no lenders. The lower home prices will likely cause the city to try to condemn additional mortgages as it slowly amputates whatever remaining value there is in the local housing market.

Las Vegas one step closer to using eminent domain to help its citizens violate contract law and break their promises

What happens in Vegas, stays in Vegas, unless you're talking about their underwater home loans. These are agreements that individuals agreed to pay, they posted collateral, and now the collateral is worth less than the loan they wish to reduce the loan amount... wait, shouldn't they have to post new collateral? The current administration doesn't think so, Bill Gross is unsure at best, and North Las Vegas City Council has signed an advisory agreement with Mortgage Resolution Partners, a hedge fund dressed in sheep's clothing, that includes exploring a plan where the City/County would effectively condemn the mortgages of its citizens, forcing the banks to write them off, and then re-issuing new mortgages to the citizens so they can stay in their homes. Of course these losses will be spread to taxpayers, pensioners, and other investors in the mortgage market all across the country and internationally. Originators will likely never lend in that city again, or at best will certainly alter the language of their docs to prevent such action if it is even legal in the first place.

This type of short-sighted plan is a good reason to fire your local politicians. They're wasting your tax dollars on a plan that does not even pass the smell test, and its going to cost you millions in legal fees before it blows up in their faces.